Don't Mind the Gap

What matters is income mobility, not income inequality.

I hate to be the bearer of good news just as the Occupy Wall Street movement is gathering steam, but protesters can stop worrying about rising inequality and go home. New evidence suggests that the super-rich got hit by the recession much harder than the rest of the 99 percent. This doesn't mean that they will be filing for food stamps any time soon. But it does mean that, contrary to progressive mythology, natural market forces might be restoring some semblance of cosmic justice.

There is no doubt that the cupidity of Wall Street fat cats combined with the perverse incentives established by federal policy created a financial bubble from which the uber-wealthy reaped rich rewards. In fact, over the last three decades, the top 1 percent of earners more than doubled their share of the national income from 8 to 17 percent, the Congressional Budget Office said last week. And it wasn't because they generated real value for the economy. Rather, notes Tyler Cowen, an economist at George Mason University, the expectation of government bailouts prompted financial managers to engage in riskier investment practices such as "shorting volatility" than they otherwise would have, ignoring long-term consequences in exchange for fat, immediate paychecks.

But "long-term" eventually arrived. New data from the University of Chicago's Steven Kaplan shows that, despite government bailouts, in 2008 and 2009 the adjusted gross income of the top 1 percent—a disproportionate number of whom work in the financial industry—fell to 1997 levels. All in all, the fat cats took a 20 percent income hit, compared with the 7 percent lower earners suffered in the aggregate. Few economists believe that the super-rich will ever reclaim all their pre-bubble earnings.

But if the wealthy are not as well off as they once were, the middle classes were never as poorly off as liberal pundits claim. Indeed, their case that income disparity is growing rests on the notion that national productivity grew four times faster (1.95 percent per year) than median household income (0.49 percent per year) between 1979 and 2007. The remaining 1.46 percent in annual productivity gains, they postulate, must have gone straight into the Swiss bank accounts of the rich.

But there are enough holes in this argument for a Zuccotti Park cleanup crew to drive a fleet of garbage trucks through. For starters, Northwestern University economist Robert Gordon has pointed out that this analysis is based on the common price index, a number that both overstates the growth in real income among the haves and understates it for the have-nots. Indeed, globalization and big-box shopping outlets such as Walmart—the very forces that liberals blame for inequality—have vastly reduced prices for modest-income folks who shop at such venues. But the Paris Hiltons of the world who patronize stores like Versace and Roberto Cavalli haven't benefited as much, because these businesses are almost completely immune to competitive price pressures. Once the productivity data is adjusted for such factors, Gordon found, the gap between the rich and poor grew only by 0.16 percent per year—or one-tenth of the 1.46 percent that liberals tout.

But none of this says anything about what Cowen has dubbed the "personal well-being gap"—the only gap that matters. Indeed, this gap, which measures the difference between basic goods that average people and gazillionaires like Bill Gates can afford, has been steadily closing. Gates might have personal physicians, private jets, and multiple computers. But thanks to technology-driven increases in productivity, almost everyone can afford bypass surgery, vacations and Internet access.

In America, well-being mobility, in a sense, comes to you without you having to go it. You don't have to be income-mobile to improve your quality of life. But that doesn't mean that Americans don't have income mobility. Far from it. Odds are, anyone who makes basically sensible life choices such as going to college, getting and staying married (preferably to a working spouse), and working full-time will find themselves in the top income quintile in their peak earning years.

This allows more Americans to be "threshold earners": After they reach a certain income level, they can trade more work for greater leisure, a luxury that only the filthy rich enjoy in poor countries. Were this not the case, the ranks of the Zuccotti Park protesters might have been thinner by about a third. A recent survey by business analyst Harrison Schultz and Baruch College professor Hector Cordero-Guzman found that about 30 percent of them had individual incomes between $50,000 and $150,000-plus (about the same percentage as are under- and unemployed). These people have obviously decided that they have enough money, and that they'd rather use their spare time protesting than working.

Surplus wealth, then, is driving the Occupy Wall Street movement as much as the alleged growth of income inequality. Somewhere, Joseph Schumpeter, the political economist who predicted that the very wealth that capitalism generates will undermine the intellectual case for capitalism's existence, must be saying, "I told you so."

Reason Foundation Senior Analyst Shikha Dalmia is a columnist at The Daily, where this column originally appeared.